REQUEST LETTER

 

03-011

 

NAME

ADDRESS

PHONE

 

Re: Private Ruling Request – Expedited Review Requested

 

We request your consideration, on an expedited basis, of the following two questions:

 

1.                  Whether a federally chartered credit union is responsible for the payment of state sales taxes on materials purchased within Utah for use in construction of a new data center, also within Utah; and

2.                  If not, whether the federal credit union’s general contractor can, as the agent of the federal credit union, purchase materials for us in the construction of the center and likewise be exempt from paying any sale taxes.

 

We have discussed this matter informally by telephone with TP REP of your office. As the federal credit union is anxious to commence work on the new center, we would appreciate your expedited review of this matter, and your determination within the next one to two weeks, if at all possible. TP REP advised us that you could perhaps expedited consideration of our request in these circumstances.

 

FACTS

 

Our client is a federally chartered credit union. It plans to construct a new $$$$$$ data center in Utah. As a federally chartered credit union, it believes it can purchase the materials for the construction of the center without payment of sales tax on those materials. It believes, for administrative convenience, that it can also have its general contractor, as its agent, purchase materials for use in constructing the center and likewise be exempt from paying any sales tax. This would be helpful to the federal credit union in reducing its direct involvement in purchasing materials, and enabling the general contractor to keep better track of these materials on the federal credit union’s behalf.

 

From the earliest days of our Republic, the federal government and its instrumentalities have been immune from state taxation under the supremacy clause of the Constitution, McCullough v Maryland, 17 U.S. (4 Wheat.) (1819).

 

12 U.S.C. § 1768 of the United States Code provides as follows:

 

The federal credit unions organized hereunder, their property, their franchises, capital reserves, surpluses, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed. Nothing herein contained shall prevent holdings in any Federal credit union organized hereunder from being included in the valuation of the personal property of the owners or holders thereof in assessing taxes imposed by authority of the state or political subdivision thereof in which the federal credit union in located; but the duty or burden of collecting or enforcing the payment of such a tax shall not be imposed upon any such Federal credit union and the tax shall not exceed the rate of taxes imposed upon holdings in domestic credit unions.

 

It has long been recognized that his federal statute exempts federal credit unions from taxes imposed by the states, including sales taxes. See, e.g., United States vs. State of Michigan, 851 F.2d803 (6^th Cir. 1988); Georgetown University Employee’s Federal Credit Union vs. District of Columbia, 525 A.2d 1014 (D.C. Ct. App. 1986) United States vs State of Maine, 524 F.Supp. 1056 (USDC Me. 1981); Tabco Federal Credit Union v Comptroller, as cited in Central Credit Union v. Comptroller of Treasury, 220 A.2d 568, 574 (Md. Ct. App. 1966). We believe the reasoning of these cases should likewise apply in this situation.

 

We also note that R865-19S-54 B.11. provides that sales to federally chartered credit unions are exempt from sales tax under Utah administrative law, as are sales to United States Instrumentalities. See R865-19S-41.

 

We recognize, of course, the exception in the federal statute regarding the imposition of taxation on “any real property and any tangible personal property of such Federal credit unions . . . to the same extent [] other similar property is taxed.” However, this exception is limited to the imposition of ad valorem taxes on real and personal property. See, e.g., United States vs. State of Michigan, supra, 851 F.2d at 805. Under no circumstances does this exception enable the imposition of sales tax in this situation. Moreover, in at least two instances (public education situations, and in situations involving religious or charitable organizations) the purchase of construction materials is not subject to sales tax under state law, meaning that “other similar property’ is not so taxed.

 

We further see no reason why materials purchased on behalf of the federal credit union by its contractor should not likewise also be considered exempt. This is, of course, the rule for materials purchased by contractors on behalf of school districts (U.C.A. § 59-12-104(2)(a)(i)), and religious or charitable institutions (R865-19S-58 B.4), and presumably the recordkeeping requirements attendant to such transactions can be satisfied by virtue of R865-19S-23.

 

We further recognize, as we discussed with TP REP, that U.C.A. § 59-12-104(2)(a)(ii) provides that construction materials purchased by the state, its institutions, and its political subdivisions may only be exempted from sales tax if they are “installed or converted to real property by employees of the state.” We also recognize that R865-19S-58 A. provides that ‘[s]ales of construction materials and other items of tangible personal property to real property contractors and repairman of real property are generally subject to tax if the contractor or repairman converts the materials or items to real property.” However, in this situation, the federal statute and the various state exemptions superceded these provisions, in our view. Attempting to impose the sales tax in this situation would violate the federal statute, and the supremacy clause.

 

We thank you for your consideration of these issues and look forward to your response.

 

Sincerely,

 

NAME

COMPANY

 

RESPONSE LETTER

 

July 25, 2003

 

NAME

ADDRESS

 

RE: Private Letter Ruling Request – Federally Chartered Credit Unions

 

Dear NAME,

 

We have received your request for a private letter ruling concerning federally chartered credit unions (“federal credit union”). Specifically, you have asked whether a federal credit union can purchase construction materials tax-free and whether a contractor hired by a federal credit union may purchase construction materials tax-free on its behalf

 

The purchase of construction materials is considered the sale of tangible personal property. Although Utah Code Ann. §59-12-103(1)(a) provides that sales of tangible personal property are taxable, Utah recognizes that a federal credit union is exempt from Utah sales and use tax. Utah Admin. Rule R865-19S-54(B)(11). Accordingly, a federal credit union may purchase tangible personal property, including construction materials, tax-free.

 

However, when a tax-exempt federal government entity, including a federal credit union, hires a contractor to convert tangible personal property into real property, the taxability of the construction materials depends on which party is considered to have purchased or owned the items. Utah Admin. Rule R865-19S-58(B)(2) (“Rule 58”) provides that a contractor who converts construction materials into real property is the consumer of the personal property, even if the contract is performed for a tax-exempt, federal government entity. In Thorup Bros. Construction, Inc. v. Auditing Division, 860 P.2d 324 (Utah 1993), the Utah Supreme Court determined that ownership of the construction materials was key to identifying the final consumer. The Court explained that if the facts and circumstances showed the construction materials were purchased by a tax-exempt entity and not its contractor, then the materials could be purchased tax-free. However, if the facts showed the construction materials were purchased or owned by the contractor, the contractor would be liable for sales tax on its purchase of the items.

 

The guidance offered in Thorup Bros. is still relevant today. While there has been subsequent legislative and administrative action concerning construction materials purchased by certain other tax-exempt entities, no such action relates to federal government entities. As there is a concern that certain provisions in Rule 58 relating to religious and charitable organizations may be overly broad, we will study whether these provisions should be reconsidered. Again, if a federal credit union purchases or owns construction materials, its purchase of these items is tax-free, even if it hires a contractor to convert them to real property. But, if the contractor purchases or owns the materials, the contractor is liable for sales tax.

 

If you have any other questions, please contact us.

For the Commission,

 

 

 

Marc B. Johnson

Commissioner

 

MBJ/KC

03-011